Part B: (22 marks) Consider a universe of three equities with the following characteristics i. Security 1: Expected return of μ = 3.00% ii. Security 2: Expected return of μ = 4.00% iii. Security 3: Expected return of μ = 5.00% iv. The inverse of the variance co-variance matrix of security returns V-1 is provided below 0.36 -0.09 0.03 -0.09 0.07 -0.02 0.03 -0.02 0.03 If you were to construct a frontier of efficient portfolios containing these three securities (showing your work), 1. Determine what the portfolio allocation would be to each security in the cases (8 marks) i. where portfolio expected return was 4.00% and, ii. where portfolio expected return was 8.00% 2. For the Global Minimum Variance (GMV) Portfolio determine the following (8 marks), i. The portfolio allocation of each security, ii. portfolio standard deviation and iii. portfolio expected return 3. Using the portfolio with expected return of 8.00% from 1. above and the GMV portfolio from 2. above, calculate the standard deviation of the efficient portfolio associated with expected return of 7.00% (6 marks)
